Nokia Stock May Have a Late Summer Dip That Will Make It a Buy
Other than a one-time spike in Nokia (NYSE:NOK) in late January investors are only barely ahead if they held. NOK stock is mostly flat in the last year as value investors accumulated shares while impatient ones sold.
Despite the lack of movement in the stock, 5G network installations are accelerating. Nokia is at the heart of an upgrade cycle. At current levels, Nokia remains an attractive, non-volatile investment.
Nokia shares traded at around $4 for much of the last year. Had it not lost its Verizon (NYSE:VZ) supply deal to Samsung, Nokia would have broken out to the upside at above $5.00.
More recently, the decent fourth-quarter results did not inspire investors. This suggests that NOK stock will remain in a steady holding pattern for a while longer.
In the fourth quarter, Nokia posted a gross margin of 41.8%. The operating margin (non-IFRS) was 16.6%, slightly above the 16.4% posted in Q4/2019. Regionally, North America’s net sales growth of 19% is the company’s bright spot. Business in Europe barely grew, up by 2%.
Although it accounted for less than €500 million in sales, China’s 9% Y/Y drop is a disappointment. Nokia’s Alcatel-Lucent unit needs to win supply deals against China’s domestic suppliers. Without the market share growth, Nokia will rely too heavily on the North American region for growth.
Dividend Reinstatement and NOK Stock
For the fourth quarter, Nokia posted its third consecutive quarter of positive free cash flow. An early payment from one of its customers added to Q4 cash flow but will be taken away in this quarter (Q1/2021). Still, the €2.1 billion increase in cash suggests that management may reinstate the dividend next.
Another year of dividend deferral may hurt the stock in the near-term. Income investors who waited for the reinstatement may finally throw in the towel.
When Ericsson (NASDAQ:ERIC) pays a small dividend that yields 1.32%, Nokia has no excuse to still suspend its payout. Cisco Systems (NASDAQ:CSCO) recently spent $730 million to acquire IMImobile. It raised its acquisition price for Acacia Communications, too. And yet, Cisco still pays a $1.48 dividend that yields around 3%.
Opportunity
Nokia may save its free cash flow for future acquisitions and/or a higher research and development spend. This will alienate income investors while adding to the company’s future growth prospects.
The firm still has lots of cost-cutting ahead to lift margins. The 5G network hardware market is fiercely competitive. Governments in developed countries may have ordered the removal of Huawei equipment. Still, Nokia must win a few big contracts in China and take Huawei’s market in the rest of the world.
On Wall Street, analysts have a $4.75 price target, on average.
As shown above, Nokia tends to underperform in March and April. It will not rise until the summer.
Savvy investors should use the relative performance chart to time the next purchase. NOK stock will fall next month and again in June if history repeats itself. This will set up a rally for the June – Sept. period.
Your Takeaway
Nokia shares held up well amid the broad sell-off in the S&P 500 and the Nasdaq. The company has room to grow margins in 2021. Higher 5G equipment orders will lift revenue and profitability.
Nokia still must cut staff and costs to improve its efficiency. It risks losing market share and getting marginalized if it does not do so.
Chinese network suppliers, Ericsson and Cisco are better run firms than Nokia. That is an ongoing risk. Management will run out of time if it does not address its competitive disadvantages. For now, the 5G contract wins are encouraging. After that, the deal value must increase to keep investors content in holding Nokia shares.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
